The Aggregation Tax Rule is a little-known tax rule that can impact your withdrawals if you own multiple annuities with the same company. It’s also sometimes called the “Serial Annuity Rule.”
This rule can catch people off guard, especially if they’re unaware of how it works. Let’s break it down and explain why it matters.
When Does the Aggregation Tax Rule Apply?
This tax rule only applies if all four of the following criteria are met:
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- Same Policyholder: The annuities must be issued to the same person.
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- Same Calendar Year: The annuities must have been issued in the same calendar year.
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- Same Company: The annuities must be from the same annuity company.
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- Non-Qualified Money: The annuities must be funded with after-tax (non-qualified) money.
If all four conditions apply, then the Aggregation Tax Rule kicks in.
How Does the Aggregation Tax Rule Work?
When this rule applies, the IRS treats multiple annuities as if they are one single annuity for tax purposes. This means:
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- Withdrawals are taxed based on the total gains across all annuities, not just the one you withdraw from.
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- The tax is calculated on the aggregate gains, combining all the interest earned in each annuity.
This can be confusing, so let’s look at an example to make it easier to understand.
A Real-Life Example of the Aggregation Tax Rule in Action
Let’s say Joe owns two annuities with the same company, and issued in the same year:
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- Annuity 1: A 5-year term, funded with $100,000.
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- Annuity 2: A 7-year term, also funded with $100,000.
By the end of the 5 years, each annuity has grown by $50,000 in interest. Joe now has:
| Annuity | Original Amount | Interest Earned | Total Value |
| Annuity 1 | $100,000 | $50,000 | $150,000 |
| Annuity 2 | $100,000 | $50,000 | $150,000 |
| Aggregate | $200,000 | $100,000 | $300,000 |
Joe decides to cash out Annuity 1, expecting to pay taxes on the $50,000 gain from that annuity. However, because of the Aggregation Tax Rule, Joe is taxed on the total $100,000 of interest from both annuities.
How to Avoid the Aggregation Tax Rule
To avoid being caught off guard by this rule, there are a few strategies you can use:
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- Use Qualified Money: If you fund your annuities with qualified money (like an IRA, 401(k), or Roth), the rule doesn’t apply. All withdrawals are taxed the same.
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- Separate Ownership: If you’re married, consider having one spouse own each annuity.
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- Different Companies: Spread your annuities across different companies to avoid this rule altogether.
For example, one of my clients in Chicago purchased multiple MYGAs over the years. To avoid the Aggregation Tax Rule and stay within the state guarantee fund limits, we placed each annuity under a different owner—one in his name and one in his wife’s name. This simple strategy saved them from any unexpected tax surprises.
Why It Pays to Work with an Annuity Specialist
Understanding these obscure rules is one of the reasons why working with an annuity specialist is so important. These aren’t side issues—they’re critical details that can save you money and stress.
At ATLAS Financial Strategies, we focus exclusively on annuities and safe money strategies. We don’t treat annuities as an add-on to a larger portfolio; they’re our specialty.
Get Expert Help with Your Annuity Strategy
If you’re looking for guidance to avoid tax traps like the Aggregation Tax Rule, I can help. Let’s create a plan that fits your goals and ensures you don’t get caught by the fine print.
To get started, book a short call with me. We’ll examine your specific situation to determine which strategy will best position you to reach your retirement goals.
All The Best,
Marty Becker
Podcast Episode 57: How To Avoid The Aggregation Tax Rule
Download Episode 57: How To Avoid The Aggregation Tax Rule on Apple Podcast